The documentation requirements are found in two pieces of regulation the tax authorities issued in 2009; the implementation measures for special tax adjustments and circular 363 entitled Strengthening the monitoring and investigation of cross-border related party transactions, Guo Shui Han [2009].

Despite the regulations only being released this year, advisers warn taxpayers not to think that the tax authorities may be lenient to companies who don’t have their documentation requirements ready in time.

“All indications are that the authorities are taking this deadline requirement very seriously. Fines ranging from Rmb2,000 ($300) to Rmb50,000 can be imposed for failure to meet the deadline,” said Matthew McKee, head of international tax services at Hwuason Lawyers.

Companies risk a transfer pricing audit by the authorities if they don't meet the documentation deadline. The authorities have indicated that companies who fail to file before the deadline are more likely to face an investigation of their tax practices.

One way to gauge how the authorities will treat companies who do not have their documentation ready in time is to look at how they enforced new reporting rules back in May.

“There will not be much leniency, based on the authorities’ attitude to reporting,” said Philip Anderson, a transfer pricing partner at Ernst & Young. “They were very strict in enforcing the reporting deadline of May 31. In fact some companies were asked to provide reports a month before the deadline.”

Sanctions, such as fines, may be the least of companies’ worries if they fail to provide documentation on time. In the absence of transfer pricing documentation, the tax authorities have the power to deem what the taxable income should be.

“Fines are relatively small. Companies that miss the deadline may be prohibited from cost-sharing or applying for advanced pricing agreements (APA),” said Ryan Chang, a transfer pricing partner at Deloitte.

Based on the reports submitted in May, the authorities have an idea of companies they may wish to audit.

“According to circular 363, companies should always be making a profit. Companies that haven’t been profitable are more likely to be audited,” said Anderson.

“The Chinese tax authorities (SAT) will target companies with losses. Depending on who you are, certain companies have to report within 10 days of the deadline which is very strict,” said McKee.

Taxpayers that have dealings in countries deemed tax havens are also more likely to be audited.

There are still some companies that are not taking the deadline seriously.

“A huge amount of companies haven’t done anything yet,” said Anderson. “Although most multinationals have toed the line.”